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Virtual Economics

A Q&A with Philip Rosedale, founder and CEO of Linden Lab, a virtual market-driven community.

More than 70,000 people participate in San Francisco-based Linden Lab’s Second Life, the first online virtual community built around economics. The company’s founder explains how a capitalist model fuels interest in a virtual world.

How does Second Life’s virtual world work?

A: Our residents create avatars. My Second Life avatar is “Philip Linden” – spiky hair, muscular tattooed arms, and sometimes a black T-shirt emblazoned with bright red Rolling Stones-style lips. Then they buy and sell land and use programming tools to develop it – homes, businesses, whatever you like.

If you want to own land, you pay a monthly fee of $9.95, which increases if you buy more land. But transactions aren’t taxed. In 2003, we had a tax revolt. Our version of the Washington Monument was replaced by a giant tower of tea crates. We got the message: there are no taxes now. We’re running about 1.4 million transactions a month, both goods and services – things like specialized programming.

And those transactions are in virtual money?

The currency is Linden dollars, which are convertible into real dollars if the players so choose, in an online market at prices they set. A recent exchange rate was 252 Linden dollars to one U.S. dollar. The GNP of Second Life in September 2005 was L$906,361,808 or U.S.$3,596,674, based on the recent L/U.S. exchange rate.

I see. People really buy into this?

The residents are creating a world which will be thousands of times more compelling than we could create ourselves. They also create and sell just about anything you can imagine – spectacular clothes, prefab houses, fun things like ray guns. Many of our residents already create scripts and objects that can be hacked and improved upon for everyone’s benefit. On a server/architectural level, we do potentially see open source and peer-to-peer on the horizon.

Assuming a continuing supply of people with too much time on their hands, how big could it get?

Hardware and bandwidth would be big issues, but in theory, Second Life software could offer everyone on the Internet a 3-D presence. When we say Second Life is the next evolutionary step after the Web, we really mean it.